Opportunity Costs

Posted in Finance, Accounting and Economics Terms, Total Reads: 2123

Definition: Opportunity Costs

In order to pursue some action, sometimes cost of an alternative must be forgone. In other words, it is the benefits which the person could have received by taking an alternative action.


The opportunity cost of going to college is the money a person would have earned if he/she worked instead. On the one hand, he/she lose four years of salary while getting his/her degree; on the other hand, he/she hopes to earn more during their career, thanks to their education, to offset the lost wages.

In terms of investment it can be explained as:

A person is having Rs.10,000 which he wants to invest. He invests in shares of a particular company which gave him return of 4%. Instead of investing in shares if he could have invested in Government bonds, he could have got return of 8%. In this situation, the opportunity costs is 4%(8% - 4%).

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